Ways to Segment Markets

Segmentation can be based on any number of criteria selected to suit a particular purpose, and each class may be segmented in more than one way.

Market segments can be defined by demographic characteristics such as gender, geography, age, occupation and wealth. Demographic categories can also be refined or customized.

Customers can also be segmented by attitude or psychological profiles, such as willingness to engage in social media or self-identification in a social group.

Historic Segmentation vs Customer-Driven Segmentation

  • Historically, market segments were based, in the worst case, on preconceptions about the behaviors or desires of certain groups or, in the best case, on research into small “representative” groups of customers.
  • Predictive segmentation can be inaccurate.
  • Today, segments can be defined by customers’ actual buying behaviors, and the result is more accurate segmentation.
  • Three different ways of segmentation might occur in a customer-driven strategy:
    • Segmentation by customer value to the business
    • Segmentation by customer needs
    • Segmentation by preferred contact channel

Segmentation by Customer Value

  • The greater the customer’s value, the better the treatment the customer receives.
  • Leading-edge organizations aim to acquire and retain profitable customers and get them to spend more.
  • Generally, a small percentage of the customer base – about 20% or less – provides a significantly higher percentage of revenues or profits. This relationship is known as the Pareto Principle.
  • The diagram below depicts how a small number of customers can generate a disproportionately large amount of profit:

Segmentation by Customer Needs

  • When we begin to discuss what services or product features profitable customer’s desire, we are moving into the second form of segmentation – segmentation by customer needs.
  • These needs may refer to specific product or service features, contact channels, or logistics channels (time and placement).
  • It is important for businesses to understand what customer want, why and how much. This is called a Value Profile.
  • Once the value profile has been created, a value proposition can then be drafted that details how each segment’s perception of value will b fulfilled by the product or service.
  • The value proposition is a key part of the promotional strategy and customer relationship.

Segmentation by Preferred Channel

  • Because of potential savings, some business sectors have chosen to reward customers that use technology channels, such as a discount for setting up automated bill payment.
  • Another option is to educate customers on the benefits of a particular channel. For example, automated call answering systems usually refer callers to Web sites for faster service and a chance to avoid a lengthy wait in a phone queue.

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